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Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies : The Economist’s Dictionary of Economics defines economics as “the study of the production, distribution, and consumption of wealth in human society.” Saint Michael’s College answers the question, “what is economics?” with brevity: “most simply put, economics is the study of making choices.”

Indiana University answers the question with a longer, more academic approach stating that “economics is a social science that studies human behavior. It has a unique method for analyzing and predicting individual behavior as well as the effects of institutions such as firms and governments, or clubs and religions.” Here we provide direct download links for Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies Important Notes in pdf format. Download and read well.

Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies : A closed economy is an economy in which no activity is conducted with outside economies. A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide consumers with everything they need from within the economy’s borders. A closed economy is the opposite of an open economy, in which a country conducts trade with outside regions.

BREAKING DOWN ‘Closed Economy’

Maintaining a closed economy is difficult in modern society, where certain raw materials, such as crude oil, have such a vital role as inputs and final goods; a country is forced to import if these resources are not naturally within its borders. Closed economies run counterintuitive to modern, liberal economic logic, which preaches opening up domestic markets to international markets to capitalize on comparative advantages and gains from trade. Through the specialization of labor and allocation of resources to their most productive, efficient means, a person is able to become wealthier.

As late philosopher and economist Henry George expounded upon in “Progress and Poverty,” the concepts of division of labor and gains from trade can be described with a simple illustration. On a plot of undeveloped, resource-abundant land, 20 people can produce much more than 20 times the amount of wealth that one person can produce, if the people cooperate intelligently. This logic holds true for households, cities and whole economies.

Proliferation of Open Trade

In 2015, the five biggest exporters of crude oil alone accounted for over $370 billion worth of exports: Saudi Arabia at $133.3 billion; Russia at $86.2 billion; Iraq at $52.2 billion; United Arab Emirates at $51.2 billion; and Canada at $50.2 billion. Even the United States, the largest producer of oil in the world, imported roughly 2.682 million annual-thousand barrels in 2015, 36.4% of which was imported from OPEC members including Saudi Arabia, Venezuela, Ecuador, Iraq and Kuwait. This underscores how reliant the global economy is on international trade.

Argument for a Closed Economy

A completely open economy runs the risk of becoming overly dependent or having important industries not develop if domestic producers are not competitive at low, international prices. For this reason, governments use controls such as tariffs, subsidies and quotas to help keep domestic enterprises profitable. Truly closed economies are rare. If anything, a government closes off a specific industry from international competition. A number of oil-producing countries have a history of prohibiting foreign oil firms from doing business within their borders.

Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies : Market-economy mostly free from trade barriers and where exports and imports form a large percentage of the GDP. No economy is totally open or closed in terms of trade restrictions, and all governments have varying degrees of control over movements of capital and labor. Degree of openness of an economy determines a government’s freedom to pursue economic policies of its choice, and the susceptibility of the country to international economic cycles. In terms of the percentage of the GDP dependent on foreign trade, the UK is a more open economy than the US.

An open economy is an economy in which there are economic activities between the domestic community and outside. People and even businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border. Trade can take the form of managerial exchange, technology transfers, and all kinds of goods and services. (However, certain exceptions exist that cannot be exchanged; the railway services of a country, for example, cannot be traded with another country to avail the service.) It contrasts with a closed economy in which international trade and finance cannot take place.

The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Exporting and importing are collectively called international trade. There are a number of economic advantages for citizens of a country with an open economy. A primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country.

If a country has an open economy, that country’s spending in any given year need not equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners. As of 2014 there is no totally-closed economy.

Karnataka Class 12 Commerce Economics Meaning Of Closed And Open Economies : Closed economy is an economy, which does not have any sort of economic relation with rest of the world but is confined to itself only. A closed economy does not enter into any one of the following activities. A closed economy is one in which the country trades only within its own borders. In an open economy, the country trades with other nations as well. Closed economies are much less common in modern society.

An open economy is the opposite of a managed economy. It is one that is characteristically market-oriented, with free market policies rather than government-imposed price controls. In an open economy industries tend to be privately owned rather than owned by the government. In the area of international trade an open economy is one whose policies promote free trade over protectionism.

What are the differences between Closed economy and open economy

Closed economies are a type of separatist way of operating the economy of a country. Countries with closed economies are entirely self-sufficient and neither export nor import goods. A closed economy is often underdeveloped since the country is unable to import products and must rely on the materials are found within its own borders. For example, if no oil or coal is found inside the borders, then the country has to look for alternative forms of energy.

Open economies are very common in the modern world due to globalization and international markets. In an open economy, the country willingly trades outside of its borders, including both imports and exports, which makes it an economic force on a global scale. Countries with slim natural resources can thrive with an open economy since they can simply trade for materials or resources that are not native to the land. Often, treaties and agreements are made between countries with open economies to ensure that trade is equal, fair and beneficial to both parties.

(i) It neither exports goods and services to the foreign countries nor imports goods and services from the foreign countries.

(iii) It neither borrows from the foreign countries nor lends to the foreign countries.

(v) Normal residents of a closed economy cannot go to other countries to work in their domestic territory. No foreigner is allowed to work in the domestic territory of a closed economy.

Due to all these seasons, Gross Domestic Product and Gross National Product are the same in a closed economy.

On the other hand, an open economy is one, which is not only involved in the process of production within its domestic territory but also can participate in production anywhere in the rest of the world. An open economy involves itself in the following activities.